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Pricing Inefficiencies in Private Real Estate Markets Using Total Return Swaps

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Author Info

  • Colin Lizieri

    ()

  • Gianluca Marcato

    ()

  • Paul Ogden

    ()

  • Andrew Baum

    ()

Abstract

Efficient markets should guarantee the existence of zero spreads for total return swaps. However, real estate markets have recorded values that are significantly different from zero in both directions. Possible explanations might suggest non-rational behaviour by inexperienced market players or unusual features of the underlying asset market. We find that institutional characteristics in the underlying market lead to market inefficiencies and, hence, to the creation of a rational trading window with upper and lower bounds within which transactions do not offer arbitrage opportunities. Given the existence of this rational trading window, we also argue that the observed spreads can substantially be explained by trading imbalances due to the limited liquidity of a newly formed market and/or to the effect of market sentiment, complementing explanations based on the lag between underlying market returns and index returns. Copyright Springer Science+Business Media, LLC 2012

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Bibliographic Info

Article provided by Springer in its journal The Journal of Real Estate Finance and Economics.

Volume (Year): 45 (2012)
Issue (Month): 3 (October)
Pages: 774-803

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Handle: RePEc:kap:jrefec:v:45:y:2012:i:3:p:774-803

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Web page: http://www.springerlink.com/link.asp?id=102945

Related research

Keywords: Total return swaps; Asset pricing; Real estate market inefficiencies;

References

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Cited by:
  1. Drouhin, Pierre-Arnaud, 2012. "Caractéristiques statistiques et dynamique de prix des produits dérivés immobiliers," Economics Thesis from University Paris Dauphine, Paris Dauphine University, number 123456789/10918 edited by Batsch, Laurent, October.
  2. Chyi Lee & Simon Stevenson & Ming-Long Lee, 2014. "Futures Trading, Spot Price Volatility and Market Efficiency: Evidence from European Real Estate Securities Futures," The Journal of Real Estate Finance and Economics, Springer, Springer, vol. 48(2), pages 299-322, February.

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